“Should you buy in today’s rally?” was the title of my article last week. It was an article made to answer the question that many investors asked as the market broke into a surprising rally at the onset of December, the week earlier.
I concluded my article with the observation that the market rally could just be what is technically called a “setup.”
As defined, a setup is a market situation that, at best, can only be an impression of an expected outcome. As such, it may or may not happen. For this reason, a setup must first undergo what is called in the trading process as confirmation.
Admittedly, there had been reported cases wherein investors decide on the basis of a setup alone and win their game. On the whole, though, it is claimed that more investors have lost their trade by doing so. Because of this, it is highly recommended that a setup must first be confirmed before any action to trade is taken.
To recall, I also expressed the feeling that the confirmation of the setup might be seen last week along with the implied action to be taken.
Outcome
Looking at the performance data made by the market so far, the market index went up by about 100 points in the first two days of December at a value turnover equivalent to P19.58 billion. This brought the market index up to 4,290.92.
On November 28 and 29, the market was down at 4,211.04 despite a two-day value turnover of some P20.0 billion, which is even a little bigger than what pushed up the market index in the first two days of December.
One factor that may have contributed to this was the fact that foreign selling coincidentally edged out foreign buying transactions in the last two days of November, a situation that was exactly the opposite of what happened in the first two days of December.
Added to that, the market was observed to be tracking a trading range. By the last two days of November, the market was noticeably at its equivalent level at the beginning of the said month.
International market leads became more positive in the first two days of December that the market became more buoyant. Investors were more bullish. They became willing to buy stocks at higher prices as a breakthrough agreement was reportedly reached by Europe’s leaders on how the ongoing debt crises in the region were to be resolved.
However, even with the full five trading days of last week, the market was only able to churn out a total value turnover equivalent to P28.05 billion. The amount was considerably lesser than the average daily total transaction of the market for the first two days of December, much more with the average daily business transaction for November.
This made the market hardly move higher from where it was at the close of the previous week even as foreign buying outweighed foreign selling transactions for the period.
As of last Friday, December 9, the market was only at 4,292.50, or 1.58 points away from where it was on December 2 at 4,290.92.
This happened as daily market performance for the week alternately ended positive one day and negative the next day.
On Friday, the market suffered another loss. With this, market gains for the week stood at only 1.58 points.
Bottom-line spin
In the general scheme of things, the trading process of entry and exit are divided into four processes, namely: identification of a setup; looking for confirmation; taking action; and management of trade. As was said, a setup leads to the creation of an expectation. As such, the investor is prodded to a corresponding course of action—that is, to either buy or sell. These measures, however, are not to be entertained not until a more concrete basis of decision is established. And this is only done through the process of confirmation.
A confirmation can be undertaken from the use of some basic tools to analyze the behavior of market price. These tools need not necessarily be exclusively based on fundamental or technical considerations. They are to ideally emanate from both.
Thus, for the more progressive investors and traders, they validate and confirm certain market setups from news articles, market development findings, by price and chart patterns and by the study on the signals given by market indicators used to track market psychology and behavior.
A confirmation is said to be achieved when all these factors conform to one eventual point of decision. A contradictory finding among these factors would discourage a decision to act.
Based on the trading results of last week, the market was not conclusively confirmed. Thus, while other market indicators continue to point to a possible upward movement of individual stock prices, market prices on the whole has actually started to go down.
And while the market appears to remain upbeat, fundamental leads worldwide seem to depict a general tapering of economic activities that will weigh down on the ability of equity markets next year to advance progressively.
Therefore, as the market’s recent effort to rally is far from being confirmed, I feel that some sectors or businesses will continue to thrive next year. Some may even do better than expected.
In this connection, I continue to recommend “taking action” on value stocks whose businesses will continue to thrive under the present economic predicament.
In the meantime, I recommend a trading play (buy and sell and vice-versa) on all of the non-index stocks that sizzled last week. The way I see it, these stocks are technically oversold. Their fundamentals are still far from being defined or concrete considering their disclosed program plans. Their price volatility will continue until their fundamentals will begin to become clear and become concretely comparable with what they are currently doing—a situation that I would say will not become evident yet in the next six months or so.
Therefore, their current market pricing is at best the product of speculation.
(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at marketrider@inquirer.com.ph or www.kapitaltek.com.)